IPO advisers beginning to take hold in U.S.

LynnCowan

(This article was originally published Thursday.)

Whether it's at a bakeoff competition to choose underwriters or a road show to woo investors, companies pursuing initial public offerings in the U.S. are starting to show up at events with the corporate equivalent of the wingman at their side: the IPO adviser.

IPO advisers are common on deals in Europe but have only begun to pop up in the U.S. in the past five to seven years, and especially in the last two, say investment bankers, accountants and corporate attorneys who used to be the only other purveyors of advice in stock offerings. Although no one tracks the number of offerings in the U.S. that have used IPO advisers, they are becoming more prevalent, these people say.

However, if investment banks underwriting IPOs had their druthers, the role of IPO adviser wouldn't exist; it's usually been the lead bookrunner who assumes the role of close confidant to the company, and having a third party involved adds another layer between the banker and a client. Bankers at major underwriting firms declined to comment on the record about their views of IPO advisers.

"If the banks were given a choice about whether to hire an adviser, many would say no just because they'd have that competitive option," said Alan R. Sheriff, who left Credit Suisse to form advisory firm Solebury Capital LLC in 2005 with a colleague, Ted Hatfield. "But once we are hired by an issuer, we are able to maintain good relationships with the banks, particularly since we work with them so regularly."

IPO advisers are hired by companies and private equity firms to help guide and manage various aspects of the IPO process in the U.S. An adviser might run a bakeoff, where investment banks come to make their pitch to be selected as an underwriter, or give the issuer independent feedback on a proposed selling price.

In some cases, such as bakeoff duties, the adviser's role varies; at one company they might just be taking over the organization of the event, while at another, they spend time preparing the company and potential underwriters to address specific issues. During a road show, advisers say they can help analyze how investors are reacting to the company's presentation and then sift through bankers' input on pricing.

"It's becoming more common for companies to hire financial advisers to help them with the IPO process, where they used to depend almost entirely on the lead underwriters for capital markets advice," said Joshua F. Bonnie, a partner in Simpson Thacher & Bartlett LLP's public company advisory practice; his law firm serves as counsel on IPO offerings, not as an IPO adviser.

Advisers also help companies negotiate fees with their underwriters, analyzing past trends on similar-sized offerings and sometimes arranging an incentive structure for a portion of the bankers' pay. IPOs in the U.S. still pay out an average of about 7% of the amount raised to bankers, according to Ipreo. But advisers may push for a 6.5% base payout and 0.5% in an incentive fee-or even lower--that is earned only if the bankers deliver great results. Advisers themselves are usually paid directly by their clients and don't get a cut of the IPO fees.

"We are focused on getting banks to compete not only on fees, but to ensure greater transparency in the process and accountability for their results," said Matthew Sperling, head of equity advisory for North America at investment bank Rothschild, which began staffing an IPO and equity advisory team in the U.S. last summer; prior to that, staff based in other countries would come in to advise on U.S. deals.

Established investment banks such as Lazard Ltd.
LAZ, -0.46%
which has a longstanding businesses providing advice on mergers and acquisitions, have begun providing IPO advice. Lazard hired Tom Tuft from Goldman Sachs Group Inc.
GS, -0.14%
in 2009 to help lead the effort from New York.

Although many underwriters still bristle at the role that IPO advisers play, some are starting to see them in a less adversarial light. At Deutsche Bank AG
DB, -0.12%
bankers have found that the presence of an adviser can help smooth the logistics of offerings, said Brad Miller, global co-head of the equity syndicate at Deutsche Bank.

"In order to find one mouthpiece to represent all parties, it's almost become more necessary to use an adviser to coordinate all the parties and find common ground. It's an additional party to include in coordinating a deal, but it can simplify the process by getting all the parties on one page," said Miller.

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